Thematic investing: mining stocks

Commodities
Investments

With the recent commodities boom, and even before, traders and investors alike have been adding fresh seams of mining stocks to their portfolios.

Unfamiliar with what they offer and how to pick them? Take a read of our thematic investing guide to the world of mining.  

How you can invest in mining stocks 

Digging into the mining sector 

Metals and minerals are key components of modern economics and manufacturing. The world can’t turn without them.  

As such, mining firms’ goods often go through periods of intense demand. We’re seeing this with right now lithium, for instance, thanks to the increasing global shift away from ICE-powered cars toward electric vehicles. Lithium is an important ingredient in battery construction, so the metal is in high demand.  

Taking a wider view, the mining industry is forecast to grow worldwide at a CAGR of 7% from now until 2025, according to Research & Markets. By that time, the sector will be worth a total of approximately $2.5 trillion.  

For 2021, y-o-y growth is looking particularly strong, forecast at 12.4%, giving the mining sector a value of $1.8 trillion by the year’s end. 

But there’s the rub. Mining is a cyclical industry. It rises and falls according to the whims of the market. If manufacturing is down, for example, then demand for metals and minerals usually falls too. 

Mining is also capital intensive. It can cost hundreds of millions, even billions, of dollars to set up new operations or to refurbish existing mines. Timing is everything. In the past, mining firms have poured money into new mines, only for them to come online just as a market downturn kicks in. 

Mining stocks, therefore, require a bit of deeper digging before investors or traders start buying. In the long term, you’d need ideally be investing in miners that are capable of weathering economic storms. Strong balance sheets and low production cuts are key markets to watch for. 

If you’re pursuing a short-term strategy, then you’ll need to do some more immediate research.  

Gold mining stocks, for instance, will be tied in with the gold price. Prices hit record highs in August 2020, reaching over $2,000, but have subsequently retreated, although gold did crack the 100-day moving average to take prices above $1,800 on May 6th, 2021. 

At the time of writing, copper is breaking all-time high records as part of a global commodities rally. Iron ore and steel are at peaking too, and aluminium continues to build on significant gains. 

But while these sectors are rising, others could be looking at long term decline. Take coal stocks for instance. While coal remains an important resource in the developing world, especially China, coal’s share of global power generation is forecast to fall to 22% by 2040. That’s still quite a significant chunk, but the greener the world gets, the less it will rely on coal for power. As such, coal miners may incur substantial drops in their revenues, profits and share prices as the 21st century progresses. 

Choosing mining stocks 

We touched on this earlier, but two key takeaways when looking at mining stocks are: 

  • Low production costs – Running a mine is expensive, so “low” is a relative term here, but you should be eyeing up companies that run mines as efficiently as possible. Try and avoid those with outdated equipment or ageing extraction sites. It is not a hard and fast rule, but generally speaking, a mining firm with low production costs can stay profitable during weaker cycles. 
  • Strong balance sheet – A miner with a strong balance sheet will, in theory, offer competitive earnings per share. Look for those companies with investment-grade bond ratings, high borrowing capacity, manageable debt and plenty of liquidity.  

Potential mining stocks for your portfolio 

Barrick Gold 

Canada’s Barrick Gold is one of the largest gold miners in the world and a global leader in copper production too. 

Its balance sheet has been bolstered in recent years by several mine sell offs. The company instead is focussing on its “Tier One” operations. These are mines that produce more than 500,000 ounces annually with at least 10-year lifespans, delivering total cash costs per ounce in the lower half of the industry cost curve. 

Feeding into this strategy is the current commodities boom with gold, and especially copper, performing strongly. Barrick’s Q1 2021 earnings, reported on May 5th, showed an 8.8% year-on-year increase for the quarter ended March 31st, totalling $2.96bn. Profit came in at $538m ($0.30 per share), against $400m ($0.22 per share) in Q1 2020. 

As a gold mining stock, Barrick is the perfect example of low-operating costs combined with a strong balance sheet. But it’s also an example of how cycles can affect mining stock prices. In this case, Barrick sold less gold by volume in Q1 2021 than the previous year, but because of the increase in gold prices, it was able to turn a higher profit.  

Orica 

When undertaking thematic investing, don’t just limit yourself to miners and mineral extractors. Consider business areas around mining, like machinery suppliers, IT solutions and software producers, or, in the case of Australian multinational Orica, explosives.  

Orica is the world’s largest commercial explosives manufacturer. The last three years have not been kind to the share price, dropping a cumulative 25% in that period.  

At the start of April, Orica shares had dropped 16% y-o-y. As of May 7th, 2021, however, its share price had begun to rise once more. 

This may be in line with the global mining growth forecast by Research & Markets amongst other commentators. More mining activity points towards a higher demand for mining-tooled explosives. Orica also appointed a new CEO, Sajeev Gandhi, in February 2021, which may have started to boost investor confidence. 

In the long term, Orica investors are up 1.1% per year over the past five years up to 2021. Looking to the short term, the explosives mining sector is up 40% according to Simply Wall Street. Paired with expected growth in mining overall, Orica could be one to watch. 

Rio Tinto 

Rio Tinto is a global mining leader. With operations mining iron ore, gold, copper, diamonds, its portfolio ensures a steady supply of revenues, and its size and general management expertise helps it weather market downturns. 

At the time of writing, as mentioned above, the world is experiencing a commodities boom. This has paid off for Rio Tinto, with its core businesses of copper, iron ore, and gold benefiting from the uptick in global metal prices. 

In terms of shares, Rio Tinto has been building on solid gains across 2020, which are being further reinforced by strengthened commodities trading. In the six months leading up to April 23rd, RIO shares had jumped 40%, reaching around 6000p on the FTSE 100. Flash forward to May 10th, RIO was trading at approximately 6660p. 

Forbes reports the Trefis Machine Learning Engine, which identifies trends in a company’s stock price data for the last ten years, has forecast similar advances for Rio Tinto over the next 6 months. Returns could potentially be as high as 12% across 2021. 

Rio Tinto improved its dividend in February 2021 reflecting strong trading across 2020. The dividend hiked 26% to 557 cents per share after the miner added a special pay-out of 93 cents to the full-year dividend of 464 cents. 

In addition to solid trading and the bump from heightened commodity prices, other aspects are at play helping reinforce RIO. It has made strides towards cutting carbon emissions, for example, and is even aiming at net-zero carbon emissions by 2050. That plays well with environmentally conscious investors. 

Mining stocks – caution still advised 

Remember: investing and trading comes with risk. You can make money, but you can also make substantial losses. When investing in gold mining stocks, or other mining company shares, be sure to do your due diligence. Only invest if you can afford to take any potential losses. 

Can the Fed beat inflation?

Morning Note

Perhaps the single biggest question mark over the broader economic picture and the macro-outlook is one of inflation. This is the key doubt we might have about the current pace of Fed policy and its willingness to look through what it sees as temporary rises in prices. Over the next few months, we will get a great deal more clarity over just how strong the inflation impulse is, how long it is likely to last and what this will imply for the path of inflation expectations, Treasury yields and Fed policy. The Fed says it will look through this – the question is really whether this is the right thing to do.

Quite apart from the asset price inflation we have seen for years; even by the relatively narrow gauge of inflation used by central banks, the kind of pricing pressures we are seeing seem pretty unprecedented. I think you are going to see Powell, Lagarde and co kind of get slapped around the chops by some hefty inflation prints over the next few months. Question is can they tough it out – bond yields will almost certainly move in one direction higher. The phrase ‘be careful what you wish for’ springs to mind.

Commodities are roofing. Corn, wheat and soybeans are trading around eight-year highs while coffee and sugar are also up strongly. It looks like there is a perfect storm of pricing pressures in the form or weather-related supply constraints and surging demand. Several factors at work: bad weather in the Upper Midwest has hit corn, whilst drought conditions in the Dakotas could also impact wheat and soybeans. The crops in South America are known to be lower this year, and demand is peaking in China and other Asian nations. Lumber prices seen a well-documented rally on a post-pandemic building boom. Copper is at a 10-year high on a mix of surging demand and supply problems in Chile, while palladium is at a record. Massive infrastructure spending is a factor, so too a major rebound in demand and supply constraints.

Last week’s PMIs told the story that has been talked about in this column for some months now. US manufacturing PMI reported input costs increased at the sharpest rate since July 2008 on severe supplier shortages and marked rises in transportation fees. The increase was the second-fastest on record as firms continued to partially pass-through costs to clients. And importantly clients can cope – consumer confidence is high, stimulus cheques have filled the coffers and people are ready to spend.

In the UK, IHS Markit recorded that rapid cost inflation persisted across the UK private sector, led by higher fuel bills, staff wages, commodity prices and freight surcharges. “A combination of greater operating expenses and stronger customer demand meant that average prices charged continued to increase at one of the fastest rates for the past three-and-a-half years,” the composite PMI reported told us.

In Europe, average input prices for manufacturing and services rose at the sharpest rate for ten years. Higher costs are usually being passed on to customers. “Average prices charged for goods and services rose at the fastest rate since January 2018, fuelled by a record increase in goods prices … Prices charged for services rose only modestly by comparison, though showed the biggest increase since the start of the pandemic,” the report said.

Meanwhile corporates are flagging the cost input inflation. Earnings calls have been charged with references to higher commodity and transport costs, which they will pass on to consumers. The comments from executives suggest their views do not seem to match squarely with the Fed’s view on a temporary inflationary impulse. The Fed looks set to be too accommodative for too long. It will ultimately need to start hiking rates really fast – if it wants the cycle to be a long one, it will need to act fast at the end of it.

Lumber prices roof to all-time high

Chart showing lumber price increases.

Corn highest since June 2013, +37% YTD

Chart showing corn price increases.

Wheat highest since February 2013, +16 YTD

Chart showing wheat price increases.

Grain and oilseed compared

Chart comparing corn & oilseed prices.

Treasury yields rose yesterday, with the 10-year yield up at its fastest pace in 4 weeks to 1.64% ahead of the Fed statement today. Stock markets in the US were flat yesterday, whilst European bourses fell slightly. Big tech largely delivered: Alphabet shares jumped 4% as it reported a massive earnings beat as YouTube ad revenues rose 50% year-on-year. Total earnings were up 34% to $55.31bn vs $51.70 expected, as earnings per share hit a lofty $26.29 vs $15.82 expected. Cloud revenues were up 46%. Meanwhile Microsoft also reported earnings and sales that beat analyst expectations, driven by growth in the cloud. Still, with shares bid up ahead of the earnings the stock dipped a little in after-hours trade.

Elsewhere, oil rallied to a week high as OPEC+ kicked their April meeting down the road for a May gathering after having set out planned production increases through to May at the March meet. WTI (Jun) rose above $63, its best since its big decline on April 20th. Gold was weaker as Treasury yields rose. Bitcoin eased back to test the 38.2% level around $53,900 with near-term MACD showing a bearish bias.

Bitcoin price chart.

Tech roars back as investors Martingale on Tesla, ITV shares down (after Morgan departure?)

Morning Note

Tech roars back: As I said last Friday, this is the kind of market that will trap bulls and bears alike. So yesterday was the classic Turnaround Tuesday as tech came roaring back following Monday’s sell-off. The Nasdaq 100 raced 4% higher and the Composite index rose 3.7%. We can put some of this down to short covering, but equally it seems the market cannot make up its mind in terms of rotation and bond yields. Today’s 10-year auction will be key – a sale of 3-year paper yesterday went off rather well and helped eased yield concerns, with the 10-year dropping 5 basis points to 1.54%. Asian shares failed to pick up the baton and European shares were mixed in early trade on Wednesday after eking our small gains on Tuesday, which followed Monday’s solid rally. The DAX trades near its record high, whilst the FTSE was down 0.5% in early trade under 6,700.

 

The risers among the tech space were among the big momentum stocks of last year: Tesla rose 20%, Peloton +14%, Baidu +14, DocuSign and Zoom both +10%. Beware these markets – they will take out both shorts and longs. Whilst the rally in tech lifted all boats, the Dow Jones only managed to rise 0.1%, slipping sharply in the last hour of trade after hitting another intra-day high at the top of the session. The S&P 500 advanced 1.4% to 3,875. This huge volatility in such a large stock as Tesla is going to be important. The sheer number of ETFs with exposure to Tesla and – by extension Bitcoin – is vast.

 

Martingale: a gambling system of continually doubling the stakes in the hope of an eventual win that must yield a net profit. Now yesterday we talked about Cathie Wood of ARK, who said she’s used the market pullback in tech stocks to dump some more liquid stocks, which also happen to make money, like Apple, in favour of her ‘highest conviction’ bets, which promise to do so some time in the future. Now this strategy of doubling down paid off handsomely yesterday as Tesla – the Innovation fund’s biggest holding – rebounded 20% and the ARKK Innovation ETF rose 10%. Timing matters a lot in investing, and I would argue that Cathie got a bit lucky with the bounce back being so strong, particularly as we are yet to see the impact of today’s 10-year bond auction across the pond, which could have serious reverberations around global markets if it goes off like the last 7-year sale. Moreover, I think yields will rise further – historically they are way below where they should be on an expected growth basis. This was one day, and momentum continues to trail value, and ARKK is still down over 20% from the peak set earlier this year. Continually Martingaling like this is surely not an advisable investment strategy, no matter how successful you have been before: past performance and all that…  

 

Anyway, tech soared yesterday, and volatility was crushed. The market wants to go up even as higher bond yields make people worry about tech valuations. Despite this, short positions on Tesla are estimated to have delivered $4.2bn in profit so far in 2021, according to estimates from Ortex. On the other hand, losses on GameStop short positions are estimated to have lost traders a total of $11bn YTD. Those losses rose again on Tuesday as GME surged another 27%. The put-call open interest ratio stands at a sturdy 3.37, with short interest at 23.6% still, according to Refinitiv data. GME was up another 5% in after-hours markets – at what time does the Street start to weigh in properly on the business’s fundamental case. I can see someone looking to grab a headline by supporting the fundamental case. Current consensus rating is at $16.80, implying a roughly 93% downside. YTD it’s up 1,200%.

 

Biden’s recovery plan will boost the global economy, according to the OECD. When you dump 10% of GDP on the world’s economy in stimulus, I’d be mighty surprised if that were not true. What’s more of an issue is just how much money is being printed vs the benefit to the economy. It’s not going to be a terribly efficient use of cash. No one is that bothered about this now – but it could become a problem once the economy is back to normal. Morgan Stanley raised its 2021 US GDP forecast by .5pp to 8.1% Q4 noting that reopening is progressing, vaccinations are ramping up and the labour market is gaining momentum. 

 

Amid and because are very different things. You can say shares are down ‘amid’ a regulatory investigation, or you can say shares are down ‘because of’ an investigation. The latter is more forceful, the former safer for writers and commentators if they are unsure why shares are doing what they are doing – sometimes shares go up or down for no reason at all. ITV shares are down over 4% this morning after the departure of Piers Morgan. Are they down because of this event or just amid his departure? Investors may be a little worried about the loss of ratings for GMB – it wasn’t exactly doing that well before he joined and its primetime slot will have repercussions for ads. Love or loathe, Morgan boosted ratings. It could also be that investors are worried about an investigation over comments made by Morgan on air. Shares were hit yesterday after it revealed the way in which lockdowns have hit ad revenues, but indicated things are picking up and Studios can drive new growth. DB today calls it a buy. You cannot be owning ITV and worry about one host, can you?

 

A clear pandemic winner, JustEat reported revenues rose 54% to €2.4bn, whilst adjusted EBITDA came in ahead of forecast at €256m, driven mainly by growth in Germany, Canada and the Netherlands. It still doesn’t make a profit on an IFRS basis. The company expects continued strong demand through 2021 as the momentum from lockdowns persists beyond the end of restrictions. New customers have been attracted to the platform and even if they don’t order as much, consumers are fairly sticky once they land. The company said it processed 588 million orders in 2020, representing a 42% increase compared with 2019 as it enjoyed three consecutive quarters of order growth acceleration last year. Investors will be pleased to see the improvement in Delivery efficiency as this lower-margin business makes up a much larger part of group earnings – the share of Delivery orders rose to 26% from 18% in 2019. The Brazilian business is picking up momentum but management reiterated that they remain willing to sell the 33% stake in iFood “if appropriate offer is made that reflects the size and superior growth of this asset”. JustEast says it has turned down several bids, the highest of which amounted to €2.3 billion. Shares advanced 0.7% in early trade.

 

Gold has recovered on the multi-year trend and multi-Fib support around the $1,695 (61.8% of last year’s rally corresponding with the 38.2% retracement of the 2016-2020 rally – see chart below) area to reclaim the $1,714. Level. Next stop for bulls will be $1,724 but yields are key. A breakdown around $1,690 calls for a retest of $1,585 area.

Gold has recovered on the multi-year trend and multi-Fib support around the $1,695.

Gold has recovered on the multi-year trend and multi-Fib support around the $1,695

Copper prices are in consolidation following a 10-year peak that was driven by a speculative pile-on (supercycle bets) and as rising Chinese stocks are starting to reduce the backwardation in the futures curve. Rising yields and a stronger dollar are also a factor. I would see this more as consolidation that a reversal.

Copper prices are in consolidation

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